Friday, October 24, 2008

Greenspan Shrugged: shocked disbelief

It has been said: blessed is the man proven right in his own lifetime. What, then, do we say about Alan Greenspan, a man who has watched his legacy as a financial "maestro" and reputation as an intellectual mastermind crumble with the tumbling economy. Summoned before Congress yesterday, Greenspan faced the scorn of Democratic leaders, harsh questioning, and admitting to making "a mistake" when it came to guiding the economy into our troubled times.

Even the New York Times could barely contain its contempt for the man, beginning its headline article about the hearings like this:

For years, a Congressional hearing with Alan Greenspan was a marquee event. Lawmakers doted on him as an economic sage. Markets jumped up or down depending on what he said. Politicians in both parties wanted the maestro on their side.

But on Thursday, almost three years after stepping down as chairman of the Federal Reserve, a humbled Mr. Greenspan admitted that he had put too much faith in the self-correcting power of free markets and had failed to anticipate the self-destructive power of wanton mortgage lending.

Greenspan, 82, is now blamed by critics and many economists, for the financial crisis sending the economy into depression. They say he encouraged housing bubble prices by keeping interest rates too low for too long and failed to support regulation which would have curbed fraudulent lending practices.

“You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis. You were advised to do so by many others,” said Representative Henry Waxman of California, chairman of the committee. “Do you feel that your ideology pushed you to make decisions that you wish you had not made?”

Greenspan conceded: “Yes, I’ve found a flaw. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact.”

The ideology in question was Greenspan's zealous adherence to Ayn Rand's Objectivist philosophy. In 1963 Greenspan wrote: Capitalism is based on self-interest and self-esteem; it holds integrity and trustworthiness as cardinal virtues and makes them pay off in the marketplace, thus demanding that men survive by means of virtue, not vices. It is this superlatively moral system that the welfare statists propose to improve upon by means of preventative law, snooping bureaucrats, and the chronic goad of fear.

Or, to strip the rhetoric away and put it into working-class terms: the markets regulate all. The markets are their own highest form of ethics. Thus, what do we need regulation for? The markets regulate themselves.It is the writing of a naive fundamentalist, one who happily believes one system can solve all problems, even the problems it creates, written by one who would become the most powerful figure in modern economics.

In the 1950s Greenspan found his way into Ayn Rand's inner circle, a group known ostentatiously as The Collective. It was a group who fancied themselves intellectuals, discussing and dreaming up financial utopias that would also free people of old moral and ethical constraints. Rand's book "Atlas Shrugged" was published in 1957. The book grandly suggests that man's highest virtue is the morality of self-interest. Capitalism, built on self-interest, had long been criticized for being uncaring and selfish. Here was a book that confidently posited that capitalism was its own grand morality. It quickly, masterfully, bridged the gap between being selfish and being ethical. It has been bedtime reading for executives ever since.

But concepts dreamed up over martinis in Manhattan high-rises sometimes have a tricky way of being falling short in the real world. In the real world greed drives banks to sell fraudulent mortgages at low introductory rates to potential home owners, then repackage them as complicated mortgage-backed securities, and sell the securities to other banks. What are they really worth? No one really knows.

This was one thing when Greenspan's housing bubble was inflating, and everyone was winning and trying to get in on the action. But once people got stuck in their ARMs at higher levels, once the housing bubble cooled and deflated and they couldn't get out from under their homes, owners began to default in large numbers, and the banks who bought the mortgages faced huge losses.

For years Greenspan argued successfully against government regulation on the market, insisting that the markets themselves were the best regulators. Greenspan also seemed to be the last person aware that a housing bubble was occurring--citing no evidence in the past that housing prices had ever declined--an explanation which can only be read as shockingly lazy. That is the problem when you replace common sense with blind faith in an ideology.

As Greenspan told Waxman: "I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms."Last year at this time I wrote of Greenspan's new book "The Age of Turbulence":

The problem with people like Greenspan and Bush is not necessarily what they believe, but that they believe their point-of-view can't possibly fail. There is no stopping someone like Bush because he has the power of religion and an almost childlike faith in America to filter his decisions. Greenspan, on the other hand, uses reason and the computational power of economics. Two very different methods of induction, yet the results are the same. Groups of power, like the Collective, like Washington think tanks, are nothing more than self-serving entities wrapped in a philosophy. It does not take long to see their morality when it comes to using other people's lives.

Greenspan slouching his way up Capitol Hill, to face an angry mob of Democratic leaders representing an American public thirsty for blood, had an almost Biblical feel. Oh, it must have been hard for the "maestro" to concede failure, and he chose his words very carefully, lest what he clothed himself in would be stripped in an afternoon.

But at the end of it all, the great man was revealed to be just a man behind the curtain, mashing the buttons and pulling the levers of the economy, perpetuating an illusion. Ironic that what he held onto so tightly has ushered in, for at least a short time, an age of economic socialism in America. I wonder what Rand, who came to America from Communist Russia, would write about that?

UpdateTim Rutten has written a column in the Los Angeles Times called "Greenspan's Blindspot" wondering this:

Did Greenspan really believe that the people in power, presented with a chance to make a killing, would put the interests of their institutions and stockholders ahead of their own?

Put aside for a second the fact that the former Fed chairman spent more than 20 years of his life as a disciple of the novelist-turned-barely-baked-philosopher Ayn Rand, whose concepts of "rational egoism" and "individualism" put the "R" in ruthless and have provided generations of gullible undergraduates an intellectual rationale for their lingering adolescent self-absorption. Has Greenspan lived through the same times the rest of America has recently experienced?

And:

Perhaps only an economic education prepares a man to draw as his conclusion from catastrophe the gnomic declaration that fallible human beings are not infallible. Some things, however, are true 100% of the time: Societies in which the few are allowed to fatten themselves without limit on the labor of many are not just; they aren't even particularly productive for very long. Countries -- like companies -- that cling to notions that allow some to pursue their own interests by behaving indecently toward others come to bad ends.